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9.10.2012 Official
Journal
of
the
European
Union L
274/1
II
(Non-legislative acts)
REGULATIONS
COMMISSION DELEGATED REGULATION (EU) No 918/2012
of 5 July 2012
supplementing Regulation (EU) No 236/2012 of the European Parliament and of the Council on
short selling and certain aspects of credit default swaps with regard to definitions, the calculation of
net short positions, covered sovereign credit default swaps, notification thresholds, liquidity
thresholds for suspending restrictions, significant falls in the value of financial instruments and
adverse events
(Text with EEA relevance)
THE EUROPEAN COMMISSION,
events are inextricably linked. To ensure coherence
between those provisions on short selling which should
enter into force at the same time, it is appropriate to
include all the provisions required by Regulation (EU)
Having regard to the Treaty on the Functioning of the European
No 236/2012 in a single Regulation.
Union,
Having regard to Regulation (EU) No 236/2012 of the European
(3) Regulation
(EU)
No
236/2012
contains
certain
defini
Parliament and of the Council of 14 March 2012 on short
tions. For further clarity and legal certainty, it is appro
selling and certain aspects of credit default swaps ( 1 ), and in
priate to provide supplementary provisions in relation to
particular Article 2(2), Article 3(7), Article 4(2), Article 7(3),
the definitions in Article 2(1), in particular when a
Article 13(4), Article 23(7) and Article 30 thereof,
natural or legal person is considered to own a financial
instrument for the purposes of the definition of a short
sale and further specification of when a natural or legal
person ‘holds’ a share or debt instrument for the
purposes of Regulation (EU) No 236/2012 are required.
Whereas:
The specifications are chosen to ensure that Regulation
(EU) No 236/2012 has the intended effect in a consistent
manner despite the divergent approach of the laws of
Member States. The concepts of ownership and holding
(1) Regulation
(EU)
No
236/2012
imposes
certain
measures
in Member States concerning securities are currently not
in relation to short selling and credit default swaps.
harmonised but the provisions of Regulation (EU)
Article 42 of Regulation (EU) No 236/2012 empowers
No 236/2012 are only intended to apply to short
the Commission to adopt delegated acts to supplement
selling and to be without prejudice to any future legal
the provisions of that Regulation in accordance with
developments such as harmonising legislation.
Article 290 of the Treaty on the Functioning of the
European Union. This delegated act supplements and
amends certain non-essential elements.
(4) Regulation
(EU)
No
236/2012
imposes
restrictions
and
obligations, such as notification and publication require
(2) The
provisions
in
this
Regulation
are
closely
linked,
since
ments, on natural or legal persons holding or entering
the notification and publication thresholds and the deter
into net short positions in shares and sovereign debt.
mination of uncovered credit default swaps depend on
Long and short positions in shares and sovereign debt
the definitions and the methods of calculation of short
can be held and valued in different ways. In order to
positions while the provisions on significant falls in the
ensure a consistent approach and give effect to the
value of financial instruments and falls in the liquidity of
intention of the measures on short positions in shares
sovereign debt markets and the determination of adverse
and sovereign debt it is therefore necessary to further
specify how net short positions should be calculated.
( 1 ) OJ L 86, 24.3.2012, p. 1.
Short sales may occur through single instruments or

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L 274/2
EN
Official Journal of the European Union
9.10.2012
through baskets of sovereign debt and so it is necessary
covered position in a sovereign credit default swap, it is
to specify how short sales through baskets are included
necessary to specify that correlation should be mean
in these calculations. In order to ensure a robust
ingful.
approach to the calculation of net short positions, it is
necessary to apply a more restrictive approach to spec
ifying long positions than short positions in shares.
Because the value of some financial instruments depend
(7) Regulation
(EU)
No
236/2012
requires
that
a
natural
or
on variations in the price of underlying instruments, it is
legal person holding a net short position in sovereign
necessary to specify how to account for this. The delta-
debt in excess of a threshold should notify the relevant
adjusted methodology is specified since it is a commonly
competent authority of these positions. An appropriate
accepted practice.
specification of this threshold is therefore required.
Minimal values that would not have any significant
impact on the relevant sovereign debt market should
not require notification and the threshold should take
(5) Net
short
positions
are
calculated
by
reference
to
the
into account, inter alia, the liquidity of each individual
long and short positions held by a natural or legal
bond market and the stock of outstanding sovereign debt
person. However long and short positions may be held
as well as the objectives of this measure.
by different entities within a group or in different funds
managed by a fund manager. Large net short positions
may be concealed by distributing them amongst entities
within a group or amongst different funds. To reduce
(8) The
data
required
for
the
calculation
of
notification
avoidance and ensure that the notifications and
thresholds for net short positions relating to issued
reporting of short positions provide an accurate and
sovereign debt will not be available at the date of entry
representative picture, more detailed provisions specifying
into force of this Regulation. Therefore the two criteria
how the calculation of net short positions should be
used to set the initial notification thresholds at the date
performed for entities within a group and for fund
of publication should be firstly the total amount of
managers are required. To give effect to these provisions
outstanding issued sovereign debt of the sovereign
it is necessary to define the meaning of investment
issuer and secondly the existence of a liquid futures
strategy in order to clarify which entities’ short
market for that sovereign debt. Revised thresholds
positions in a group and which funds’ short positions
should be adopted when the relevant data on all the
should be aggregated. It is also necessary to define
criteria is available.
management activities to clarify which funds’ short
positions should be aggregated. In order to ensure that
the notifications are made, it is necessary to specify
which entities within a group or in different funds are
required to perform the calculations and make the notifi
(9) Where
the
liquidity
in
a
sovereign
debt
market
falls
cations.
below a certain threshold, the restrictions on investors
entering into uncovered short sales of sovereign debt
may be lifted temporarily for the purpose of stimulating
liquidity in that market. Where there is a significant fall
in the value of a financial instrument on a trading venue,
(6) Regulation
(EU)
No
236/2012
imposes
restrictions
on
entering into uncovered sovereign credit default swap
competent authorities may prohibit, restrict short selling
transactions but permits sovereign covered credit
or otherwise limit transactions in that instrument. There
default swaps entered into for legitimate hedging
are a wide variety of instruments and it is necessary to
purposes. A wide variety of assets and liabilities may
specify the threshold for each of the different classes of
be hedged using sovereign credit default swaps but distin
financial instruments taking into account, differences
guishing between legitimate hedging and speculation may
such as those between the instruments and the
be difficult in many cases. Detailed and additional spec
different volatilities of their respective markets.
ification of the cases in which a sovereign credit default
swap can be considered to be covered is therefore
required. Where a quantitative measure of correlation
needs to be specified on a consistent basis, a simple,
(10) No
threshold
for
a
significant
fall
in
the
value
of
the
unit
widely accepted and understood measure such as the
price of a listed UCITS, except for exchange-traded funds
Pearson’s correlation coefficient should be used,
that are UCITS, is specified in this Regulation as although
calculated as the covariance of two variables divided by
the price may vary freely in the trading venue, it is
the product of their standard deviations. Matching assets
subject to a rule in Directive 2009/65/EC of the
and liabilities to create a perfect hedge is in practice
European Parliament and of the Council of 13 July
difficult due to the diverse characteristics of different
2009 on the coordination of laws, regulations and
assets and liabilities as well as volatility in their values.
administrative provisions relating to undertakings for
Regulation (EU) No 236/2012 requires a proportionate
collective investment in transferable securities (UCITS) ( 1 )
approach to measures and when defining an uncovered
which keeps the prices close to the net asset value of the
credit default swap, it is therefore necessary to specify
UCITS. No threshold for a significant fall in the value of
how a proportionate approach should be applied to
derivatives is specified other than those specified in this
assets and liabilities hedged by a covered credit default
Regulation.
swap. Whereas Regulation (EU) No 236/2012 does not
prescribe a specific degree of correlation necessary for a
( 1 ) OJ L 302, 17.11.2009, p. 32.

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EN
9.10.2012 Official
Journal
of
the
European
Union L
274/3
(11) This
Regulation
clarifies
the
intervention
powers
of
both
— Article 30 of Regulation (EU) No 236/2012 further spec
the relevant competent authorities and the European
ifying criteria and factors to be taken into account in deter
Securities Markets Authority (ESMA) established and
mining in which cases the adverse events or developments
exercising its powers in accordance with Regulation
referred to in Articles 18 to 21 and Article 27 and the
(EU) No 1095/2010 of the European Parliament and of
threats referred to in point (a) of Article 28(2) of Regulation
the Council ( 1 ) as regards adverse events or devel
(EU) No 236/2012 arise.
opments. A list of these events is required to ensure a
consistent approach while permitting appropriate action
to be taken where unforeseen adverse events or devel
opments occur.
Article 2
Definitions
For the purposes of this Regulation, the following definitions
(12) For
reasons
of
legal
certainty
it
is
necessary
that
this
shall apply:
Regulation enter into force on the same day as
Commission Delegated Regulation (EU) No 919/2012 ( 2 ),
(a) ‘group’ means those legal entities which are controlled
undertakings within the meaning of Article 2(1)(f) of
HAS ADOPTED THIS REGULATION:
Directive 2004/109/EC of the European Parliament and of
the Council ( 3 ) and the single natural or legal person that
controls such undertaking;
CHAPTER I
GENERAL
Article 1
(b) ‘supra-national issuer’ means an issuer within the meaning
of Article 2(1)(d)(i), (iv), (v) and (vi) of Regulation (EU)
Subject matter
No 236/2012.
This Regulation lays down detailed rules supplementing the
following Articles of Regulation (EU) No 236/2012 with
regard to:
CHAPTER II
SUPPLEMENTARY SPECIFICATION OF DEFINITIONS
PURSUANT TO ARTICLE 2(2) AND ARTICLE 3(7)(a)
— Article 2(2) of Regulation (EU) No 236/2012 further spec
ifying the definitions of ownership and short sale,
Article 3
Specification of the term ‘ownership’ and defining a short
sale
— Article 3(7) of Regulation (EU) No 236/2012 further spec
1. For the purposes of defining a short sale, the deter
ifying cases of and the method for calculating a net short
mination, where applicable, of whether a natural or legal
position and the definition of holding,
person is considered to own a financial instrument when
there are legal or beneficial ownerships thereof shall be made
in accordance with the law applicable to the relevant short sale
— Article 4(2) of Regulation (EU) No 236/2012 further spec
of that share or debt instrument. Where natural or legal persons
ifying uncovered positions in sovereign credit default swaps
are the beneficial owners of a share or debt instrument, that
and the calculation methods for groups and fund
share or debt instrument shall be deemed to be owned by the
management activities,
ultimate beneficial owner, including where the share or debt
instrument is held by a nominee. For the purposes of this
Article, the beneficial owner shall be the investor who
— Article 7(3) of Regulation (EU) No 236/2012 further spec
assumes the economic risk of acquiring a financial instrument.
ifying the notification threshold for significant short
positions in sovereign debt,
2. For
the
purposes
of
points
(i),
(ii)
and
(iii)
of
Article
2(1)(b)
of Regulation (EU) No 236/2012, and a ‘short sale’ within the
— Article 13(4) of Regulation (EU) No 236/2012 further spec
meaning of Article 2(1)(b) of Regulation (EU) No 236/2012,
ifying the liquidity threshold for suspending restrictions on
does not include:
short sales of sovereign debt,
(a) the sale of financial instruments that have been transferred
— Article 23(7) of Regulation (EU) No 236/2012 further spec
under a securities lending or repo agreement, provided that
ifying the meaning of significant falls in value of financial
the securities will either be returned or the transferor recalls
instruments other than liquid shares,
the securities so that settlement can be effected when it is
due;
( 1 ) OJ L 331, 15.12.2010, p. 84.
( 2 ) See page 16 of this Official Journal.
( 3 ) OJ L 390, 31.12.2004, p. 38.

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L 274/4
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Official Journal of the European Union
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(b) the sale of a financial instrument by a natural or legal
2. For the purposes of Article 3(1)(a) and 3(3) of Regulation
person who has purchased the financial instrument prior
(EU) No 236/2012 where a position in a financial instrument,
to the sale but has not taken delivery of that financial
including those listed in Annex I, Part 1, confers a financial
instrument at the time of the sale provided that the
advantage in the event of a decrease in the price or value of
financial instrument will be delivered at such time that
the share, this position shall be taken into account in calculating
the settlement may be effected when due;
the short position.
(c) the sale of a financial instrument by a natural or legal
person who has exercised an option or a similar claim on
Article 7
that financial instrument, provided that the financial
instrument will be delivered at such a time that the
Net short positions in shares — general
settlement may be effected when due.
The following criteria shall be taken into account for the
purposes of net short positions referred to in Articles 5 and 6:
Article 4
Holding
(a) it is irrelevant whether a cash settlement or physical delivery
A natural or legal person is considered to hold a share or debt
of underlying assets has been agreed;
instrument for the purposes of Article 3(2)(a) of Regulation (EU)
No 236/2012 in the following circumstances:
(b) short positions on financial instruments that give rise to a
(a) the natural or legal person owns the share or debt
claim to unissued shares, and subscription rights,
instrument in accordance with Article 3(1);
convertible bonds and other comparable instruments shall
not be considered as short positions when calculating a net
short position.
(b) an enforceable claim to be transferred ownership of the
share or debt instrument to the natural or legal person in
accordance with the law applicable to the relevant sale.
Article 8
CHAPTER III
Net short position in sovereign debt — long positions
NET SHORT POSITIONS PURSUANT TO ARTICLE 3(7)(b)
1.
For the purposes of this Article and Annex II, pricing shall
mean the yield, or where there is no yield for one of the
Article 5
relevant assets or liabilities or the yield is an inappropriate
Net short positions in shares — long positions
comparator between the relevant assets or liabilities, it shall
mean the price. The holding of a sovereign debt instrument
1.
The holding of a share through a long position in a basket
through a long position in a basket of sovereign debt
of shares shall, in relation to that share, also be taken into
instruments of different sovereign issuers shall in relation to
account to the extent that that share is represented in that
that sovereign debt, also be taken into account to the extent
basket.
that that sovereign debt is represented in that basket.
2. Any
exposure
through
a
financial
instrument
other
than
the share which confers a financial advantage in the event of an
2. For the purpose of Article 3(2)(b) of Regulation (EU)
increase in the price of the share as set out in Article 3(2)(b) of
No 236/2012, any exposure through an instrument other
Regulation (EU) No 236/2012 means any exposure to share
than the sovereign debt which confers a financial advantage
capital through any one or more of the instruments listed in
in the event of an increase in the price of the sovereign debt
Annex I, Part 1.
means any exposure through any one or more of the
instruments listed in Annex I, Part 2 provided always that
their value depends on the value of the sovereign debt in
The exposure referred to in the first subparagraph depends on
respect of which a net short position has to be calculated,
the value of the share in respect of which a net short position
and which confers a financial advantage in the event of an
has to be calculated, and which confers a financial advantage in
increase in the price or value of the sovereign debt.
the event of an increase in the price or value of the share.
Article 6
3. Provided
always
that
they
are
highly
correlated
in
Net short positions in shares — short positions
accordance with Article 3(5) of Regulation (EU) No 236/2012
and with paragraphs 4 and 5, all net holdings of sovereign debt
1. A short sale of a share through the short sale of a basket
of a sovereign issuer which is highly correlated with the pricing
of shares shall, in relation to that share, also be taken into
of the sovereign debt in any short position shall be included in
account to the extent that that share is represented in the
the calculation of the long position. Sovereign debt instruments
basket.
from issuers located outside the Union shall not be included.

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EN
9.10.2012 Official
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of
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European
Union L
274/5
4. For
assets
with
a
liquid
market
price,
a
high
correlation 5. In
calculating
net
short
positions,
it
is
irrelevant
whether
between the pricing of a debt instrument of another sovereign
cash settlement or physical delivery of underlying assets has
issuer and the pricing of the debt of the given sovereign issuer
been agreed.
shall be measured on a historical basis using daily accumulated
weighted data for the 12-month period preceding the position
in the sovereign debt. For assets for which there is no liquid
Article 10
market or where the price history is less than 12 months, an
appropriate proxy of similar duration shall be used.
Method of calculation of net short positions in relation to
shares
1. For
the
purposes
of
calculating
the
net
short
position
in
5. For
the
purposes
of
Article
3(5)
of
Regulation
(EU) shares pursuant to Article 3(4) of Regulation (EU)
No 236/2012, a debt instrument and a issued sovereign debt
No 236/2012, the delta-adjusted model for shares set out in
shall be considered to be highly correlated where the Pearson’s
Annex II shall be used.
correlation coefficient is at least 80 % between the pricing of the
debt instrument of another sovereign issuer and the pricing of
the given sovereign debt for the relevant period.
2. Any calculations by a natural or legal person of a long
and short position in relation to the same shares shall use the
same methods.
6. If
the
position
subsequently
ceases
to
be
highly
correlated
based on a rolling 12-month time-frame, then the sovereign
debt of the previously highly correlated sovereign issuer shall
3. The
calculation
of
net
short
positions
shall
take
into
no longer be taken into account when calculating a long
account transactions in all financial instruments, whether on
position. However, positions shall not be deemed to cease to
or outside a trading venue, that confer a financial advantage
be highly correlated where there is a temporary fall in the level
in the event of a change in price or value of the share.
of correlation of the sovereign debt for no more than three
months below the level set out in paragraph 4, provided that
the correlation coefficient is at least of 60 % throughout this
Article 11
three-month period.
Calculation of net short positions for sovereign debt
1. For
the
purposes
of
Article
3(5)
of
Regulation
(EU)
7. In
calculating
net
short
positions,
it
shall
be
irrelevant No 236/2012, net short positions in sovereign debt shall be
whether a cash settlement or physical delivery of underlying
calculated by taking into account transactions in all financial
assets has been agreed.
instruments that confer a financial advantage in the event of a
change in the price or yield of the sovereign debt. The delta-
adjusted model for sovereign debt set out in Annex II shall be
Article 9
used.
Net short positions in sovereign debt — short positions
1.
A short sale of sovereign debt through the sale of a basket
2. In
accordance
with
Article
3(6)
of
Regulation
(EU)
of sovereign debt shall in relation to that sovereign debt also be
No 236/2012 positions shall be calculated for every sovereign
taken into account to the extent that that sovereign debt is
issuer in which a natural or legal person holds a short position.
represented in the basket.
CHAPTER IV
2. For the purposes of Article 3(1)(a) and 3(3) of Regulation
NET SHORT POSITIONS IN FUNDS OR GROUPS PURSUANT
(EU) No 236/2012 where a position in an instrument, including
TO ARTICLE 3(7)(c)
those listed in Article 8(2), confers a financial advantage in the
event of a decrease in the price or value of the sovereign debt,
Article 12
this position shall be taken into account in calculating the short
position.
Method of calculating positions for management activities
related to several funds or managed portfolios
1. The
calculation
of
the
net
short
position
in
a
particular
3. Any
sovereign
credit
default
swap
referenced
to
a issuer shall be made in accordance with Article 3(7)(a) and (b)
sovereign issuer shall be included in the calculation of net
of Regulation (EU) No 236/2012 for each individual fund, irre
short positions in that sovereign debt. Sales of sovereign
spective of its legal form and for each managed portfolio.
credit default swaps shall be considered to be long positions
and purchases of sovereign credit default swaps shall be
considered to be short positions.
2. For
the
purposes
of
Article
12
and
Article
13,
the
following definitions shall apply:
4. If
a
sovereign
credit
default
swap
position
is
hedging
a
risk other than the referenced sovereign debt, the value of the
(a) ‘investment strategy’ means a strategy that is pursued by a
hedged risk cannot be treated as a long position for the
management entity, regarding a particular issuer, that aims
purposes of calculating whether a natural or legal person has
to have either a net short or a net long position taken
a net short position in the issued sovereign debt of a sovereign
through transactions in various financial instruments
issuer.
issued by or that relate to that issuer;

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Official Journal of the European Union
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(b) ‘management activities’ means management of funds irre
issuer when it reaches or exceeds a notification or disclosure
spective of their legal form and portfolio management in
threshold. Where one or more of the legal entities constituting
accordance with mandates given by clients on a discre
the group are management entities, they shall apply the method
tionary client-by-client basis where such portfolios include
described in Article 12(1) to 12(4) for fund and portfolio
one or more financial instruments;
management activities.
(c) ‘management entity’ means a legal person or entity,
2. The
net
short
and
long
positions
of
all
the
legal
entities
including a division, unit or department that manages, on
constituting the group shall be aggregated and netted, with the
a discretionary basis, funds or portfolios pursuant to a
exception of the positions of the management entities that
mandate.
perform management activities. The group shall report, and
disclose where relevant, the net short position in a particular
issuer when it reaches or exceeds a relevant notification or
3. The
management
entity
shall
aggregate
the
net
short disclosure threshold.
positions of the funds and portfolios under its management
for which the same investment strategy is pursued in relation
to a particular issuer.
3. When
a
net
short
position
reaches
or
crosses
the
notifi
cation threshold in accordance with Article 5 or disclosure
threshold in accordance with Article 6 of Regulation (EU)
4. When applying the method described above, the No 236/2012 then a legal entity within the group shall
management entity shall:
report, and disclose in accordance with Articles 5 to 11 of
Regulation (EU) No 236/2012 the net short position in a
particular issuer calculated according to paragraph 1 provided
(a) take into account the positions of the funds and portfolios
that no net short position at group level calculated according to
the management of which has been delegated by a third
paragraph 2 reaches or crosses a notification or disclosure
party;
threshold. A legal entity designated for this purpose shall
report, and disclose where relevant, the net short position at
group level in a particular issuer calculated according to
(b) exclude the positions of the funds and portfolios the
paragraph 2 when:
management of which it has delegated to a third party.
(i) no notification or disclosure threshold is reached or crossed
The management entity shall report, and disclose where
by any legal entity within the group;
required, the net short position that results from paragraphs 3
and 4 when it reaches or exceeds a relevant notification or
disclosure threshold in accordance with Articles 5 to 11 of
Regulation (EU) No 236/2012.
(ii) a notification or disclosure threshold is reached or crossed
simultaneously both by the group itself and any legal entity
within that group.
5. Where
a
single
legal
entity
is
performing
management
activities together with other non-management activities, it
shall apply the method described set out in paragraphs 1 to
CHAPTER V
3 to its management activities only and report, and disclose the
COVERED SOVEREIGN CREDIT DEFAULT SWAPS PURSUANT
resulting net short positions.
TO ARTICLE 4(2)
Article 14
6. For
its
non-management
activities
that
give
rise
to
the Cases which are not uncovered sovereign credit default
holding of short positions by the entity for its own account,
swap positions
that single legal entity shall perform the calculation of the net
short position in a particular issuer in accordance with
1. In
the
following
cases
a
sovereign
credit
default
swap
Article 3(7)(a) and (b) of Regulation (EU) No 236/2012 and
position shall not be considered an uncovered position in
report, and disclose the resulting net short positions.
accordance with Article 4(1) of Regulation (EU) No 236/2012.
Article 13
(a) In respect of hedges for the purpose of Article 4(1)(b) of
Method of calculating positions for legal entities within a
Regulation (EU) No 236/2012, the sovereign credit default
group that have long or short positions in relation to a
swap shall not be considered an uncovered position in
particular issuer
accordance with Article 4(1) of Regulation (EU)
No 236/2012 and shall serve to hedge against the risk of
1. The
calculation
of
the
net
short
position
shall
be
made
in
decline in the value of assets or liabilities correlated with the
accordance with Article 3(7)(a) and (b) of Regulation (EU)
risk of the decline of the value of the sovereign debt which
No 236/2012 for each legal entity constituting the group. The
the credit default swap references and where those assets or
relevant legal entity, or on its behalf, the group it belongs to,
liabilities refer to public or private sector entities in the
shall report, and disclose, the net short position in a particular
same Member State.

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European
Union L
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(b) A sovereign credit default swap position, in which assets or
(b) where there is a parent holding company which own or
liabilities refer to public or private sector entities in the
controls a subsidiary operating company in a different
same Member State as the reference sovereign for the
Member States. If the parent company is the issuer of the
credit default swap, shall not be considered an uncovered
bond but the assets and revenues that are hedged are owned
position in accordance with Article 4(1) of Regulation (EU)
by the subsidiary, it shall be permissible to buy sovereign
No 236/2012 where it:
credit default swaps referenced to the Member State of the
subsidiary;
(i) references a Member State, including any ministry,
agency or special purpose vehicle of the Member
(c) to hedge an exposure to a company in one Member State
State, or in the case of a Member State that is a
which has invested in the sovereign debt of a second
federal state, one of the members making up the feder
Member State to the extent that that company would be
ation;
significantly impacted in the event of a significant fall in the
value of the sovereign debt of the second Member State,
provided that the company is established in both Member
States. Where the correlation between this risk and the debt
(ii) is used to hedge any assets or liabilities meeting the
of the second Member State is greater than the correlation
correlation test set out in Article 18.
between this risk and the debt of the Member State in
which the company is established it shall be permissible
to buy sovereign credit default swaps referenced to the
second Member State.
(c) A sovereign credit default swap position, where the assets or
liabilities refer to a sovereign issuer in which the reference
sovereign for the credit default swap is a guarantor or
2. A
sovereign
credit
default
swap
position
shall
not
be
shareholder, shall not be considered an uncovered position
considered an uncovered position in the following cases, in
in accordance with Article 4(1) of Regulation (EU)
accordance with Article 4(1) of Regulation (EU) No 236/2012,
No 236/2012 where it:
and provided that the correlation test in Article 18 of this
Regulation is met in each case:
(i) references a Member State;
(a) where the obligor of, or counterparty to, an asset or liability
being hedged is a company which has operations across the
Union or where the exposure being hedged relates to the
(ii) is used to hedge any assets or liabilities meeting the
Union or the Member States which have the euro as their
correlation test set out in Article 18.
currency, it shall be permissible to hedge it with an appro
priate European or euro area index of sovereign bond credit
default swaps;
2. For the purposes of point (a) of paragraph 1, a correlation
shall exist between the value of the asset or liability being
hedged and the value of the referenced sovereign debt as set
(b) where the counterparty to an asset or liability being hedged
out in Article 18.
is a supra-national issuer, it shall be permissible to hedge
the counterparty risk with an appropriately chosen basket of
sovereign credit default swaps referencing that entity’s guar
antors or shareholders.
Article 15
Cases which are not uncovered sovereign credit default
swap positions where the obligor is established or the
Article 16
asset or liability is located in more than one Member State
Justification of uncovered sovereign credit default swap
1. Where
the
obligor
of,
or
counterparty
to,
an
asset
or
positions
liability is established in more than one Member State a
Any natural or legal person entering into a sovereign credit
sovereign credit default swap position shall not be considered
default swap position shall, on the request of the competent
an uncovered position in the following cases, in accordance
authority:
with Article 4(1) of Regulation (EU) No 236/2012, and
provided that the correlation test in Article 18 of this Regu
lation is met in each case:
(a) justify to that competent authority which of the cases set
out in Article 15 were fulfilled at the time the position was
entered into;
(a) where there is a parent company in one Member State and
a subsidiary in another Member State and a loan has been
made to the subsidiary. Where there is either explicit or
(b) demonstrate to that competent authority compliance with
implicit credit support to the subsidiary by the parent, it
the correlation test in Article 18 and the proportionality
shall be permissible to purchase sovereign credit default
requirements in Article 19 in respect of that sovereign
swaps in the Member State of the parent rather than the
credit default swap position at any time that they hold
subsidiary;
that sovereign credit default swap.

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Article 17
(b) the qualitative correlation shall be met by showing mean
ingful correlation, which means a correlation that is based
Hedged assets and liabilities
on appropriate data and is not evidence of a merely
The following are cases where assets and liabilities may be
temporary dependence. The correlation shall be calculated
hedged through a sovereign credit default swap position,
on a historical basis using data for the 12 months of trading
provided the conditions set out in Articles 15 and 18 and in
days before the sovereign credit default swap position is
Regulation (EU) No 236/2012 are met:
taken out, weighted to the most recent time. A different
time-frame shall be used if it is demonstrated that the
conditions prevailing in that period were similar to those
at the time that the sovereign credit default swap position is
(a) a long position in the sovereign debt of the relevant issuer;
to be taken out or which would occur in the period of the
exposure being hedged. For assets for which there is not a
liquid market price or where there is not a sufficiently long
(b) any position or portfolio used in the context of hedging
price history, an appropriate proxy shall be used.
exposures to the sovereign issuer referenced in the credit
default swaps;
2. The
correlation
test
in
paragraph
1
shall
be
deemed
to
have been met if it can be demonstrated that:
(c) any assets or liabilities which refer to public sector entities
in the Member State whose sovereign debt is referenced in
the credit default swap. This includes exposures to central,
regional and local administration, public sector entities or
(a) the exposure being hedged relates to an enterprise which is
any exposure guaranteed by the referred entity and may
owned by the sovereign issuer or where the sovereign issuer
include financial contracts, a portfolio of assets or
owns a majority of its voting share capital or whose debts
financial obligations, interest rate or currency swap trans
are guaranteed by the sovereign issuer;
actions where the sovereign credit default swap is used as a
counterparty risk management tool for hedging exposure on
financial or foreign trade contracts;
(b) the exposure being hedged relates to a regional, local or
municipal government of the Member State;
(d) exposures to private sector entities established in the
Member State which is referenced in the sovereign credit
default swap. The exposures in question include but are not
(c) the exposure being hedged relates to an enterprise whose
limited to loans, counterparty credit risk (including potential
cash flows are significantly dependent on contracts from a
exposure when regulatory capital is required for such
sovereign issuer or a project which is funded or significantly
exposure), receivables and guarantees. The assets and
funded or underwritten by a sovereign issuer, such as an
liabilities include but are not limited to financial contracts,
infrastructure project.
a portfolio of assets or financial obligations, interest rate or
currency swap transactions where the sovereign credit
default swap is used as a counterparty risk management
3. The
relevant
party
shall
justify
that
the
correlation
test
was
tool for hedging exposure on financial contracts or trade
met at the time that the sovereign credit default swap position
finance exposures;
was entered into upon request by the relevant competent auth
ority.
(e) any indirect exposures to any of the above entities obtained
through exposure to indices, funds or special purpose
Article 19
vehicles.
Proportionality
1. In determining whether the size of the sovereign credit
Article 18
default swap position is proportionate to the size of the
exposures hedged, where a perfect hedge is not possible, an
Correlation tests
exact match is not required and limited over-provision shall
1. The
correlation
test
referred
to
in
this
Chapter
shall
be be permitted in accordance with paragraph 2. The relevant
met in either of the following cases:
party shall justify upon request to the competent authority
why an exact match was not possible.
(a) the quantitative correlation test shall be met by showing a
Pearson’s correlation coefficient of at least 70 % between the
2. Where justified by the nature of the assets and liabilities
price of the assets or liabilities and the price of the
being hedged and their relationship to the value of the
sovereign debt calculated on a historical basis using data
obligations of the sovereign which are within the scope of
for at least a period of 12 months of trading days
the credit default swap, a greater value of sovereign credit
immediately preceding the date when the sovereign credit
default swap shall be held to hedge a given value of exposures.
default swap position is taken out;
However, this shall only be permitted where it is demonstrated

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9.10.2012 Official
Journal
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European
Union L
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that a larger value of sovereign credit default swap is necessary
3. When calculating the value of market value adjusted risks
to match a relevant measure of risk associated with the
for which a dynamic hedging strategy is required, the calcu
reference portfolio, taking into account as the following factors:
lations must be undertaken on a risk-adjusted rather than
notional basis, taking into account the extent to which an
exposure might increase or decrease during its duration and
(a) the size of the nominal position;
the relative volatilities of the assets and liabilities being
hedged and of the referenced sovereign debt. A beta adjustment
shall be used if the asset or liability for which the credit default
(b) the sensitivity ratio of the exposures to the obligations of
swap position is being used as a hedge is different from the
the sovereign which are within the scope of the credit
reference asset of the credit default swap.
default swap;
(c) whether the hedging strategy involved is dynamic or static.
4. Indirect
exposures
to
risks,
such
as
through
indices,
funds,
special purpose vehicles, and to credit default swap positions
shall be taken into account in proportion to the extent the
3.
It is the responsibility of the position holder to ensure that
reference asset, liability or credit default swap is represented
its sovereign credit default swap position remains proportionate
in the index, fund or other mechanism.
at all times and that the duration of the sovereign credit default
swap position is aligned as closely as practicable given
prevailing market conventions and liquidity with the duration
of the exposures being hedged or the period during which the
5. The value of the eligible portfolio of assets or liabilities to
person intends to hold the exposure. If the exposures being
be hedged shall be deducted from the value of the net credit
hedged by the credit default swap position are liquidated or
default swaps position held. If the resulting number is positive
redeemed, they must either be replaced by equivalent
the position shall be considered to be an uncovered credit
exposures or the credit default swap position must be reduced
default swaps position in accordance with Article 4(1) of Regu
or otherwise disposed of.
lation (EU) No 236/2012.
4. Provided
that
a
sovereign
credit
default
swap
position
was
covered at the time it was entered into, it shall not be treated as
CHAPTER VI
becoming uncovered where the sole reason for the position
becoming uncovered is a fluctuation in the market value of
NOTIFICATION THRESHOLDS FOR NET SHORT POSITIONS IN
the hedged exposures or the value of the sovereign credit
SOVEREIGN DEBT PURSUANT TO ARTICLE 7(3)
default swap.
Article 21
Notification thresholds for net short positions relating to
5. In
all
circumstances,
where
parties
accept
a
sovereign
the issued sovereign debt
credit default swap position as a consequence of their
obligations as members of a central counterparty which clears
1. The
relevant
measure
for
the
threshold
that
triggers
notifi
sovereign credit default swap transactions and as a result of the
cation to the relevant competent authority of net short
operation of the rules of that central counterparty, such a
positions in the issued sovereign debt of a sovereign issuer
position shall be treated as involuntary and not as a position
shall be a percentage of the total amount of outstanding
that the party has entered into and so shall not be considered
issued sovereign debt for each sovereign issuer.
uncovered pursuant to Article 4(1) of Regulation (EU)
No 236/2012.
2. The
reporting
threshold
shall
be
a
monetary
amount.
This
Article 20
monetary amount shall be fixed by applying the percentage
threshold to the outstanding sovereign debt of the sovereign
Method of calculation of an uncovered sovereign credit
issuer and rounding up to the nearest million euro.
default swap position
1. The
calculation
of
a
natural
or
legal
person’s
sovereign
credit default swap position shall be its net position.
3. The monetary amount implied by the percentage
threshold shall be revised and updated quarterly in order to
2. When calculating the value of the eligible risks hedged or
reflect changes in the total amount of outstanding issued
to be hedged by a sovereign credit default swap position a
sovereign debt of each sovereign issuer.
distinction shall be made between static and dynamic hedging
strategies. For static hedging, such as direct exposures to
sovereign or public sector bodies in the sovereign, the metric
used shall be the jump to default measure of the loss if the
4. The monetary amount implied by the percentage
entity to which the position holder is exposed defaults. The
threshold and the total amount of outstanding issued
resulting value shall then be compared against the net
sovereign debt shall be calculated in accordance with the
notional value of the credit default swap position.
method of calculation for net short positions in sovereign debt.

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L 274/10
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9.10.2012
5. The
initial
amounts
and
additional
incremental
levels
for
CHAPTER VII
sovereign issuers shall be determined on the basis of the
following factors:
PARAMETERS AND METHODS FOR CALCULATING LIQUIDITY
THRESHOLD FOR SUSPENDING RESTRICTIONS ON SHORT
SALES OF SOVEREIGN DEBT PURSUANT TO ARTICLE 13(4)
(a) the thresholds shall not require notifications of net short
Article 22
positions of minimal value in any sovereign issuers;
Methods for calculating and determining the threshold of
liquidity for suspending restrictions on short sales in
sovereign debt
(b) the total amount of outstanding sovereign debt for a
sovereign issuer and average size of positions held by
1. The
measure
of
liquidity
of
the
issued
sovereign
debt
to
be
market participants relating to the sovereign debt of that
used by each competent authority is the turnover, defined as the
sovereign issuer;
total nominal value of debt instruments traded, in relation to a
basket of benchmarks with different maturities.
(c) the liquidity of the sovereign debt market of each sovereign
issuer, including, where appropriate, the liquidity of the
2. The
temporary
suspension
of
restrictions
on
uncovered
futures market for that sovereign debt.
short sales in sovereign debt may be triggered when the
turnover of a month falls below the fifth percentile of the
monthly volume traded in the previous 12 months.
6. Taking
into
account
the
factors
in
paragraph
5,
the
relevant notification thresholds for the initial amount to be
3. To perform these calculations each competent authority
considered for each sovereign issuer is a percentage that
shall use the representative data readily available, from one or
equals 0,1 % or 0,5 % of the total amount of outstanding
more trading venues, from over the counter (OTC) trading or
issued sovereign debt. The relevant percentage to be applied
from both, and inform ESMA of the data used thereafter.
for each issuer shall be determined in application of the
criteria described in paragraph 5, so that each sovereign issuer
is assigned one of the two percentage thresholds used to
4. Before
the
competent
authorities
exercise
the
power
to
lift
calculate the monetary amounts that will be relevant for notifi
the restrictions on short selling related to sovereign debt, they
cation.
shall ensure that the significant drop in liquidity is not the result
of seasonal effects on liquidity.
7. The
two
initial
threshold
categories
at
the
date
of
entry
into force of this Regulation shall be:
CHAPTER VIII
SIGNIFICANT FALL IN VALUE FOR FINANCIAL INSTRUMENTS
(a) an initial threshold of 0,1 % applicable where the total
OTHER THAN LIQUID SHARES PURSUANT TO ARTICLE 23
amount of the outstanding issued sovereign debt is
Article 23
between 0 and 500 billion euro;
Significant fall in value for financial instruments other than
liquid shares
(b) a threshold of 0,5 % applicable where the total amount of
1.
In respect of a share other than a liquid share, a significant
the outstanding issued sovereign debt is above 500 billion
fall in value during a single trading day compared to the closing
euro or where there is a liquid futures market for the
price of the previous trading day means:
particular sovereign debt.
(a) a decrease in the price of the share of 10 % or more where
8. The
additional
incremental
levels
shall
be
set
at
50
%
of
the share is included in the main national equity index and
the initial thresholds and shall be:
is the underlying financial instrument for a derivative
contract admitted to trading on a trading venue;
(a) each 0,05 % above the initial notification threshold of 0,1 %
starting at 0,15 %;
(b) a decrease in the price of the share of 20 % or more where
the share price is EUR 0,50 or higher, or the equivalent in
the local currency;
(b) each 0,25 % above the initial threshold of 0,5 % starting at
0,75 %.
(c) a decrease in the price of the share of 40 % or more in all
other cases.
9. The
sovereign
issuer
shall
move
to
the
appropriate
threshold group where there has been a change in the
2. An increase of 7 % or more in the yield across the yield
sovereign debt market of the sovereign issuer and, applying
curve during a single trading day for the relevant sovereign
the factors specified in paragraph 5, that change has subsisted
issuer shall be considered a significant fall in value for a
for at least one calendar year.
sovereign bond.

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3. An increase of 10 % or more in the yield of a corporate
(b) a rating action or a default by any Member State or banks
bond during a single trading day shall be considered a
and other financial institutions deemed important to the
significant fall in value for a corporate bond.
global financial system such as insurance companies,
market infrastructure providers and asset management
companies operating within the Union that causes or
could reasonably be expected to cause severe uncertainty
4. A decrease of 1,5 % or more in the price of a money-
about their solvency;
market instrument during a single trading day shall be
considered a significant fall in value for a money-market
instrument.
(c) substantial selling pressures or unusual volatility causing
significant downward spirals in any financial instrument
related to any banks and other financial institutions
5. A decrease of 10 % or more in the price of an exchange-
deemed important to the global financial system such as
traded fund during a single trading day shall be considered a
insurance companies, market infrastructure providers and
significant fall in value for an exchange-traded fund, including
asset management companies operating within the Union
exchange-traded funds that are UCITS. A leveraged exchange-
and sovereign issuers as the case may be;
traded fund shall be adjusted by the relevant leverage ratio to
reflect a 10 % fall in the price of an equivalent unleveraged
direct exchange-traded fund. A reverse exchange-traded fund
(d) any relevant damage to the physical structures of important
shall be adjusted by a factor of -1 to reflect a 10 % fall in
financial issuers, market infrastructures, clearing and
the price of an equivalent unleveraged direct exchange-traded
settlement systems, and supervisors which may adversely
fund.
affect markets in particular where such damage results
from a natural disaster or terrorist attack;
6. Where
a
derivative,
including
financial
contracts
for
difference, is traded on a trading venue and has as its only
(e) any relevant disruption in any payment system or
underlying financial instrument, a financial instrument for
settlement process, in particular when it is related to
which a significant fall in value is specified in this Article and
interbank operations, that causes or may cause significant
Article 23(5) of Regulation (EU) No 236/2012, a significant fall
payments or settlement failures or delays within the Union
in value in that derivative instrument shall be considered to
payment systems, especially when these may lead to the
have occurred when there has been a significant fall in that
propagation of financial or economic stress in a bank and
underlying financial instrument.
other financial institutions deemed important to the global
financial system such as insurance companies, market infra
structure providers and asset management companies or in
a Member State.
CHAPTER IX
ADVERSE EVENTS OR DEVELOPMENTS PURSUANT TO
ARTICLE 30
2. For the purposes of Article 27, ESMA shall take into
Article 24
account the possibility of any spillovers or contagion to other
systems or issuers and, especially, the existence of any type of
Criteria and factors to be taken into account in
self-fulfilling phenomena when considering the criteria in
determining when adverse events or developments and
paragraph 1.
threats arise
1. For the purposes of Articles 18 to 21 of Regulation (EU)
No 236/2012 adverse events or developments that may
3.
For the purposes of Article 28(2)(a), a threat to the orderly
constitute a serious threat to the financial stability or market
functioning and integrity of financial markets or to the stability
confidence in the Member State concerned or in one or more
of the whole or part of the financial system in the Union shall
other Member States pursuant to Article 30 of Regulation (EU)
mean:
No 236/2012 include any act, result, fact, or event that is or
could reasonably be expected to lead to the following:
(a) any threat of serious financial, monetary or budgetary insta
bility concerning a Member State or the financial system
(a) serious financial, monetary or budgetary problems which
within a Member State when this may seriously threaten
may lead to financial instability concerning a Member
the orderly functioning and integrity of financial markets
State or a bank and other financial institutions deemed
or the stability of the whole or part of the financial
important to the global financial system such as insurance
system in the Union;
companies, market infrastructure providers and asset
management companies operating within the Union when
this may threaten the orderly functioning and integrity of
financial markets or the stability of the financial system in
(b) the possibility of a default by any Member State or supra-
the Union;
national issuer;

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L 274/12
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Official Journal of the European Union
9.10.2012
(c) any serious damage to the physical structures of important
payment systems, especially when these may lead to the
financial issuers, market infrastructures, clearing and
propagation of financial or economic stress in the whole
settlement systems, and supervisors which may seriously
or part of the financial system in the Union.
affect cross-border markets in particular where such
damage results from a natural disaster or terrorist attack
when this may seriously threaten the orderly functioning
Article 25
and integrity of financial markets or the stability of the
Entry into force
whole or part of the financial system in the Union;
This Regulation shall enter into force on the third day following
that of its publication in the Official Journal of the European
(d) any serious disruption in any payment system or settlement
Union.
process, in particular when it is related to interbank oper
ations, that causes or may cause significant payments or
settlement failures or delays within the Union cross-border
It shall apply from 1 November 2012.
This Regulation shall be binding in its entirety and directly applicable in all Member States.
Done at Brussels, 5 July 2012.
For the Commission
The President
José Manuel BARROSO

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ANNEX I
PART 1
Article 5 and 6
— Options,
— Covered warrants,
— Futures,
— Index-related instruments,
— Contracts for difference,
— Shares/units of exchange-traded funds,
— Swaps,
— Spread bets,
— Packaged retail or professional investment products,
— Complex derivatives,
— Certificates linked to shares,
— Global depositary receipts.
PART 2
Article 7
— Options,
— Futures,
— Index-related instruments,
— Contracts for difference,
— Swaps,
— Spread bets,
— Complex derivatives,
— Certificates linked to sovereign debt.

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L 274/14
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Official Journal of the European Union
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ANNEX II
PART 1
The delta-adjusted model for shares
Article 10
1. Any derivative and cash position shall be accounted for on a delta-adjusted basis, with cash position having delta 1.
In order to calculate the delta of a derivative, investors shall take into account the current implied volatility of the
derivative and the closing price or last price of the underlying instrument. In order to calculate a net short position
including equity or cash investments and derivatives, natural or legal persons shall calculate the individual delta-adjusted
position of every derivative that is held in the portfolio, adding or subtracting all cash positions as appropriate.
2.
A nominal cash short position may not be offset by an equivalent nominal long position taken in derivatives. Delta-
adjusted long positions in derivatives may not compensate identical nominal short positions taken in other financial
instruments due to the delta adjustment. Natural or legal persons entering into derivatives contracts giving rise to net
short positions that must be notified or published pursuant to Articles 5 to 11 of Regulation (EU) No 236/2012 shall
calculate net short position changes in their portfolio arising from changes in the delta.
3. Any transaction that confers a financial advantage in the event of a change in price or value of the share held as
part of a basket, index or exchange-traded fund shall be included when calculating the position in each individual share.
Positions on these financial instruments shall be calculated taking into account the weight of that share in the underlying
basket, index or fund. Natural or legal persons shall perform calculations in these financial instruments in accordance with
Article 3(3) of Regulation (EU) No 236/2012.
4. The net short position shall be calculated by netting long and short delta-adjusted positions in a given issuer.
5. For the issued share capital, when issuers have several share classes, the total number of shares issued in each class
and shall be taken into account and added up.
6. The calculation of net short positions shall take into account changes in the share capital of the issuer that may
trigger or eliminate notification obligations in accordance with Article 5 of Regulation (EU) No 236/2012.
7. New shares issued from a capital increase shall be accounted for in the calculation of the total issued share capital
from the day they are admitted to trading on a trading venue.
8. The net short position expressed as a percentage of the company’s issued share capital shall be calculated by
dividing the net short position in equivalent shares by the total issued share capital of the company.
PART 2
The delta-adjusted model for sovereign debt
Article 11
1. Any cash positions shall be taken into account using their nominal value duration adjusted. Options and other
derivative instruments shall be adjusted by their delta which shall be calculated in accordance with Part 1. Calculations of
net short positions containing both cash investments and derivatives shall be the individual delta-adjusted position of
every derivative that is held in the portfolio, adding or subtracting all cash positions and cash positions shall have a delta
equal to 1.
2. Nominal positions in bonds issued in currencies other than the euro shall be converted to euro using the last
reliable updated spot currency price available. The same principle shall apply to other financial instruments.
3. Other
derivatives,
such
as
forward
bonds,
shall
be
also
adjusted
in
accordance
with
paragraphs
1,
2
and
3.
4.
Any economic interest or position that creates a financial advantage in sovereign debt held as part of a basket, index
or exchange-traded fund shall be included when calculating the position in each individual sovereign debt. Positions on
these financial instruments shall be calculated taking into account the weight of that sovereign exposure in the underlying
basket, index or fund. Investors shall perform calculations in these financial instruments in accordance with Article 3(3) of
Regulation (EU) No 236/2012.

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5. Calculations for sovereign debt instruments with high correlation shall follow the same methods of calculation of
long positions in debt instruments of a sovereign issuer. Long positions in debt instruments of a sovereign issuer the
pricing of which is highly correlated to the pricing of the given sovereign debt shall be taken into account for calculation
purposes. When these positions no longer meet the test of high correlation then they shall not be taken into account to
offset short positions.
6. Nominal long positions of credit default swaps shall be included in the calculation as short positions. In calculating
an investor sovereign credit default swaps position its net positions shall be used. Positions intended to be covered or
hedged through the purchase of a credit default swap that are not sovereign bonds will not be taken into account as long
positions. Credit default swaps shall be considered to have delta 1.
7. The net short position shall be calculated by netting nominal delta-adjusted equivalent long and short positions in
the issued sovereign debt of a sovereign issuer.
8. The net short position shall be expressed as a monetary amount in euro.
9. Calculation of positions shall take into account changes in correlations and in the total sovereign debt of a
sovereign issuer.
10. Only long positions in debt instruments of a sovereign issuer the pricing of which is highly correlated to the
pricing of sovereign debt of a sovereign issuer shall be taken into account to offset short positions in the said sovereign
debt. A given long position of a highly correlated debt shall only be used once to offset a short position in cases where
the investor maintains several short positions of different sovereign issuers. The same long position cannot be applied
several times to net off different short positions taken in highly correlated sovereign debt.
11. Natural or legal persons with multiple allocations of long positions of highly correlated debt across several
different sovereign issuers shall have records that show their allocation methods.

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Document Outline

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